This month, we summarise the top five greatest dangers facing buyers in acquiring a company.
1) The seller leans back
Buyers try to bind sellers to the company post acquisition, but often the shareholders agreement negotiations become so complicated that sellers are eventually let off the hook for a discount in the acquisition price.
2) Overvalued companies
Founders often overestimate the value of their companies by adding goodwill items on top of multiples based valuations. Buyers try to argue against this, but they often end up having to give up some synergy value if they really want the deal.
3) Balloons for balloons
Listed buyers are sometimes so keen to make acquisitions that they are willing to overpay in hope of still higher appreciation of their own shares. To justify the higher prices, buyers turn a blind eye when sellers inflate profits. In a few years, however the numbers start to suffer and eager-beaver management may get fired.
4) Companies milked dry
Peek performing companies are usually offered at premium prices, while most buyers are afraid to buy them, as they are hard to improve. It’s best to time the sale just before the peek, to leave some upside for the buyer too. Urgency discounts are often bad bargains as the price could get much lower if the buyer just waited. Examples abound from the latest recession.
5) Balanced warranties
It is a fallacy of sellers to get similar protection from buyers to what they are expected to provide. This approach is unjustified, as sellers in most cases get cash on closing, which is better than a fully secured and liquid guarantee upfront
About IMAP MB Partners
IMAP is a leading global mergers and acquisitions advisory organization. Formed in 1973, IMAP is the world’s most established and experienced middle-market M&A organization. It provides creative solutions for M&A through a partnership of hand-selected independent offices.
MB Partners aims to ‘democratize’ M&A advisory, and make world-standard M&A services available to owners of medium size enterprises and company managers. The mission of MB Partners is to become the leading sell-side and buyout advisor to the Hungarian entrepreneurial and private equity sector and